For years, people have been able to build up retirement pots safe in the knowledge that when they die, these can be passed to their family free of inheritance tax (IHT).
From April 2027, this will change. Pensions will now become a part of someone’s estate when IHT is calculated, meaning those sitting on large pots may end up paying the tax.
For many, this means rethinking retirement planning to reduce the bills their families will face.
Lou Valdini, 71, from York, is one person having to do this. He says the incoming rule has “scuppered his entire retirement planning”.
IHT is owed at a rate of 40 per cent on estates worth more than £325,000, though there are multiple rules which can push this threshold higher.
Married couples can pool their allowances and you get an extra allowance if your primary residence forms part of your estate. Also, until now, pensions have not been included when an estate is calculated.
It means many have saved into their pensions as a way of trying to cut their bills.
“The original idea was I would leave my SIPP [self-invested personal pension] pot sitting there and what would be left of it would go to my children,” Lou explains.
Lou is now aiming to avoid his estate being pushed over the IHT threshold, so the original plan has changed.
He says he is “mulling over” what to do, but that one way Lou is cutting his estate is by providing financial support to his two children now via gifting, rather than after he passes.
Lou has already provided £105,000 in financial support to help his son buy a house and said he will dip further into his savings to help his daughter as well.
If you gift money more than seven years before your death, there is no IHT charged to the people who receive it. Gifts given less than seven years before death only face a tapering tax rate, which is between 8 per cent and 40 per cent.
Lou said: “My children always say they don’t expect anything from me but the whole reason I bothered to save is to leave something to them and that’s what I want to do.”
Gifting money to children is becoming relatively common amongst those who can afford to do so.
Research from wealth manager Saltus found that out of 2,000 people with investable assets of £250,000 or more, 73 per cent have provided financial support to their adult children in the past five years.
Other research by Aldermore Bank found that parents have given more than £8,000 on average from their own savings to support adult children.
Gifting is speeding up what many people are calling a “great wealth transfer” from retirees to millennials and Gen Zs.
Lou draws just below £50,000 a year from his pension, but he is also concerned that pension rules could change again, which would require another rethink of his retirement planning.
In previous years, there have been rumours that the Government could reduce the amount that can be taken tax-free from pensions – currently 25 per cent for most savers – but these have not yet come to fruition.
One thing Lou has looked at when examining his retirement planning is buying an annuity – which is a pension product that gives you a fixed income each year throughout your later years.
This is an alternative to drawdown, where you flexibly pull money from your pension pot.
But Lou says worry about future changes to pension rules do loom in his mind.
“The state of finances at the moment – you don’t know what the government will do tomorrow and that’s a bit of a concern,” he said.
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